October 2023 - Week 3 Edition

Post-Mortem on the 2023 Federal Deficit -- $1.7 Trillion, and Rising

On Tuesday, October 10, the non-partisan Congressional Budget Office (CBO) calculated the total red ink for federal fiscal year 2023 (ending September 30, 2023) was $1.7 trillion, 23% above 2022, the first Biden budget blowout year (with $1.38 trillion in red ink). Why the increase? Biden didn’t have any more COVID-19 checks to blame, as that ended in Trump’s final year. He didn’t have those extended unemployment checks to blame, since they ended in 2021. He didn’t have a recession to blame, as growth continued, albeit at a slow pace, in the last year. The red ink was due mostly to increased over-spending and interest on the national debt.

Biden’s first major spending over-reach was the American Rescue Plan, passed in his first full month in office, February 2021, when the economy was humming along and did not need rescuing. A Democrat, economist Larry Summers, blasted it as “the least responsible economic plan in 40 years” and highly inflationary. He was proven right, as inflation and high deficits followed. Biden didn’t learn from that lesson, as he and his Democratic Congress then passed a comically misnamed Inflation Reduction Act on August 16, 2022, which was “designed to curb inflation by possibly reducing the federal budget deficit.” A definition that is currently listed on Wikipedia. I love that weasel word “possibly,” as in “with crossed fingers, knowing better.”

A significant amount of the 2023 deficit came from the spending provisions in the Inflation Reduction Act, plus support of Ukraine. And now, as we enter federal fiscal year 2024, perhaps Biden’s final year in office, America faces a second proxy war – adding our support of Israel to our support of Ukraine and stretching our defense budget to its limit. The Wall Street Journal voiced its concern for the necessary funding of all this overseas spending in an editorial, “Wall Street Isn’t Sure It Can Handle All of Washington’s Bonds.”

Reflecting this chaos, gold, silver, and crude oil all rose by at least 5% last week, with much of the gain coming on Friday the 13th, when it seemed the Israeli war could escalate further, disrupting the flow of crude oil. At the very least, the world will likely impose sanctions on Iran’s oil exports, reducing the overseas supply flow at a time when the Biden Administration is at war with fossil fuels.

President Biden has also depleted the Strategic Petroleum Reserve to a 17-day supply after releasing approximately 200 million barrels in 2022. This was a political attempt to lower inflation rates by capping crude oil prices and help democrats win more Congressional seats in the 2022 mid-term elections, thereby limiting the 2023 Republican majority in the House and indirectly causing the current Speaker of the House controversy.

Reflecting these twin scourges of inflation and rising debt, US Treasury bond yields have resumed their rise. The 30-year rate (the basis for home most mortgages) rose to 4.86% and the benchmark 10-year Treasury rates rose from 4.58% (at last Wednesday’s open, before the inflation indicators were released) to 4.71% at Thursday’s close (after both the PPI and CPI had been released). To make matters worse for most stock investors, the Federal Reserve then released the minutes from its latest (September 20) Federal Open Market Committee (FOMC) meeting, in which the Fed stated it would keep its key interest rate high (over 5%) for longer than analysts previously assumed. Specifically, the FOMC minutes stated their position will “shift from how high to raise the policy rate to how long to hold the policy rate at restrictive levels.”

Last week, the Biden Administration also increased its insurance company sanctions on shipments of Russian oil, so between these new restrictions and the outbreak of war in the Middle East, crude oil had its biggest weekly price rise in six months. Prices will likely stay high, as our best “friend” in the Mideast, Saudi Arabia, is no real friend of President Biden. He has insulted the Saudi Royal Family so much that the Saudis will likely try to keep their exports limited and keep oil prices high to force Biden out of office.

In this fast-changing world, everyone has seemingly forgotten about China, which may have entered into a recession, and is hungry to revive the global trade it once dominated. Chinese exports and imports have both declined 6.2% in September, the fifth straight month that exports have declined. If they can’t get their economy humming again, what actions will they take? Does the attention on Israel and Palestine or Russia and Ukraine provide the diversion China needs to invade Taiwan? Can America or the world afford to divide their attention, money and weaponry in three wars?

These crises point to a rise in gold as a crisis hedge, and we have already seen those beginnings. I want to stress that it is in time like this that investors in precious metals look at increasing their stake. For those who have never considered investing in gold and silver, now is the time. As I have explained for decades, gold is insurance for your investment portfolio and I recommended having, at least, 10 to 20 percent of your investments be in precious metals. I would also like to point out that as your net worth increases your gold and silver assets should increase, as well. Buying precious metals should not be a one-time, one-size-fits-all investment, as your portfolio grows, so should your stake in hard assets like gold and silver. Call our professional account representatives to find out more.

Krugman: Inflation is Low (If you Exclude Almost Everything You Buy) 

I proffer that almost no one is so out of touch with reality as some academic economists but a Nobel Prize winner writing for the New York Times must live on another planet. Dr. Paul Krugman once said that inflation doesn’t hurt the poor, on the grounds that the poor are debtors more than savers, and inflation hurts savings while reducing net debt loads. To his credit, Krugman eventually walked back that nonsense, since poor people fret far more about their next gas tank, or grocery bill, or rent, than calculating the relative cost of their credit cards. However, they are most assuredly affected by the interest rates being increased on those credit cards due to inflation.

Krugman has now stepped into another warm mound of doggy doo, this time on social media. Last This past Thursday, after the fairly “hot” inflation numbers were released, he wrote inflation is not so bad if you exclude food, energy, shelter, and used cars. Specifically, the Nobel Prize winner posted this piece of pretzel logic on his “X” (formerly Twitter) account under the caption, “The war on inflation is over. We won, at very little cost. The X post included a graph of declining inflation rates that was subtitled: “CPI excluding food, energy, shelter and used cars,” referring to four purchases in high demand by most Americans.

As expected, the responses were comical with one wag countering: “This is fantastic news for all those Americans who don’t need food, a place to live, fuel or electricity,”  

Most workers are still losing ground to inflation. Many are going on strike since their hourly earnings are only rising about half as fast as prices. Family income has declined in real (after-inflation) terms for three years. US Census Bureau data revealed household income fell to $74,850 in 2022, down nearly $1,800 from 2021, a 2.3 percent decrease, the sharpest drop since the Great Financial Crisis of 2007-2010. Median income is also down three years in a row at 5% in all, yet Krugman insists Biden’s economy is “thriving.”

Why not take a shopping trip with a poor family, Dr. Krugman or volunteer with a charitable organization trying to help people in need, like our employees and families do? Do some first-hand research for a change.

Gold rose over 5% last week. The widely traded December gold futures contract rose from $1,830 on October 6 to $1,927 on October 13 (+5.3%). On the London exchange, the Friday-to-Friday final price fixes were $1,819.60 for October 6 (just before the war in Israel broke out) to $1,909.20 on October 13 (+4.9%). In the same week, crude oil prices rose even more (+5.9%), from $82.79 to $87.69 per barrel. The December silver futures contract also rose strongly (+5.5%) last week, from $21.54 to $22.73.

Metals Market Report Archive >